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Thursday, May 17, 2012

Employment Guarantee Act in Nepal

While a cycle of political deadlock, hope and uncertainty continue to plague political sphere, Prime Minister Dr.Baburam Bhattarai’s government quietly approved an Employment Guarantee Act (EGA) and sent it to the parliament for endorsement. The EGA, modeled along India’s Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), will guarantee jobs to households below poverty line (BPL). If endorsed by the parliament and implemented from next fiscal year, this demand-driven scheme —originally drafted by National Planning Commission (NPC)— will help in reducing unemployment and under-employment, which is estimated to be around 46 percent of population, reduce distress migration from rural to urban areas, boost agriculture productivity, and enhance livelihood opportunities. Unfortunately, this hugely consequential public works program is not adequately discussed and consulted with relevant stakeholders.

The EGA guarantees 100 days of employment per year to one adult member of BPL households. Apart from providing jobs, the scheme seeks to create infrastructure that would help in boosting productivity and livelihood opportunities. According to NPC officials jobs will be provided in work related to construction, infrastructure, industries and other development projects. If the government is unable to provide jobs within a stipulated deadline to those who are eligible and demand one, then it will have to pay unemployment allowance equivalent to around 50 to 60 percent of minimum wage. It will have grievance redressal mechanism set up at grassroots level. In an economy with 83 percent of the population still living in rural areas, time-tested and successful public works program like employment guarantee will be a vital policy tool for social protection. That being said, without proper planning, monitoring and executive agencies at grassroots level, there is also a danger that the scheme could be a huge fiscal burden and a major instrument for elite capture, i.e. wealthy and those in power capture funds and works meant for the needy and poor.

In India, MGNREGA came into force on February 2, 2006 with an aim to directly touch the lives of the poor and promote inclusive growth. This flagship rural employment scheme of the Congress government is credited for partly helping the party get an astounding electoral victory in 2005. MGNREGA is an extension of Employment Guarantee Scheme (EGS) implemented in Maharashtra in 1979 in response to debilitating impact of famine and drought on poor households. The scheme guarantees employment within 15 days if a qualified person submits employment application at a local administrative authority. The wage rate is equal to the unskilled agriculture labor wage, which is now adjusted for inflation as well. Currently, the MGNREGA wage is highest in Haryana (IRs 191 per day) and lowest in Bihar and Jharkhand (IRs 122 per day). The average wage across all states and union territories is IRs 145 per day for seven hours of manual unskilled work. The work has to be provided within 5 km radius of the village a person is residing or else extra wage of 10 percent is payable. Moreover, working and living facilities (safe drinking water, shade for children and periods of rest for workers, first-aid box for emergency treatment and minor injuries, and safety equipment and measures for health hazards connected with work) have to be provided. At least one-third of the work is reserved for women and the while designing work by the Gram Panchayats 60:40 wage to material ratio has to be maintained. The permissible work is related to water management, land management and rural connectivity in and around the areas where the workers reside.

The program is running into its sixth year of operation and its assessment thus far has largely been positive. In its first year, the program was implemented in the 200 most backward districts. The next year it covered an additional 130 districts and now it covers all districts of India. In 2010/11, it provided employment to 55 million households and of the 2.6 billion persons-days of work provided, 47.7 percent was taken up by women and 51 percent by Scheduled Castes (SCs) and Scheduled Tribes (STs). Latest estimate shows that the cost of MGNREGA is about 0.45 percent of GDP, 3.19 percent of expenditure and 5.08 percent of revenue.

Preliminary cost estimate of employment guarantee scheme

Number of BPL population (million)

6.71

Minimum agri wage per day (NRs)

195

Average household size

4.90

Number of households BPL

1369028.57

Potential employment demand (15-59 years)

742013.49

Wage cost per day, billion

0.14

Wage cost per year (100 days of employment), billion

14.47

Administrative cost (25 percent of wage cost), billion

3.62

Total cost (wage plus administrative), billion

18.09

Total cost (share of budget for FY 2011-12)

4.70

Total cost (share of GDP in constant prices, 2011-12)

2.69

Source: Own estimate based on Census 2011 and NLSS III data

A quick estimate of the potential cost of the proposed EGA reveals that to cover all adults of BPL households (as per NLSS III) it would cost at most 2.69 percent and 4.7 percent of 2011/12 GDP and budget respectively. It includes wage and administrative costs of providing employment to around 0.74 million adults from 1.37 million BPL households. However, implementing the program is not as easy as it sounds because of the need to generate additional revenue to fund the program, the need to finalize central-state power division to execute and share cost burden, and the inherent administrative hassles and shortcomings.

First, implementing EGA without additional sources of funding or without cutting unproductive and untargeted subsidies would be a challenge in the face of rising budget deficit, which is expected to reach about 3.8 percent of GDP this year. Finding an additional Rs 18 billion for EGA when the MoF is struggling to secure enough funds for retired PLA combatants along with additional expenses required for Nepal Army in the post-integration era is a big headache for MoF officials. The problem compounds when revenue growth fails to keep pace with expenditure growth.

Second, NPC’s hurry in getting it implemented from next fiscal year would invite operational trouble because EGA typically mandates federal states to cover some portion of the cost as seen in the case of MGNREGA in India. EGA designed now without taking into account this political aspect is going to run into serious trouble. Furthermore, all other employment schemes need to be either scrapped or incorporated in EGA to ensure smooth operation, plug leakages, and avert duplicates. The required homework on this front is dismal.

Third, without strong local level institutions (VDCs) and representatives manning local offices, leakages will be extremely high. Implementing the scheme with weak grassroots institutions would result in fudging of muster rolls, manipulation of account by contractors and elite capture of the employment slots meant for BPL households. This is precisely one of the reasons why Karnali Employment Guarantee Program failed to yield satisfactory result. The EGA should be allowed to be used as yet another tool for political parties and their supporters to legally plunder state coffers without adding any value to productive capacity of the nation.

Fourth, the work under EGA should be strictly related to rural sector, including land management, water management and rural road connectivity—all of which will help boost agriculture production and productivity. The program is meant for BPL households and public works should be carried out in places where most of them reside, i.e. rural areas. Also, the assets created should be fairly long lasting so that they not only help agriculture sector, but also link this with the industrial sector.

Fifth, since large-scale social protection schemes like EGA create temporary distortions in the agriculture labor market, the government should be able to adequately deal with such byproducts. For instance, the MGNREGA wage rate put upward pressure on overall wage rate in India and created a shortage of labor in major agriculture states like Punjab and Haryana, where workers from poor states like Bihar and Uttar Pradesh migrated during lean agriculture season. This will also happen in our economy and temporarily affect both agriculture and industrial sectors.

Overall, while it is commendable that the NPC is pushing for the implementation of EGA, the government should realize that the scheme would be a waste of resources if it is implemented without adequate institutional set up and clear cost sharing mechanism between central and state governments. Importantly, it should be ensured that the scheme is demand-driven rather than supply-driven and adequate initiatives are instituted beforehand to plug loopholes and inefficiency.

About

Formerly, economics officer at Asian Development Bank, Nepal Resident Mission. Worked as a researcher at SAWTEE, Kathmandu. Also, worked as a consultant for Ministry of Commerce & Supplies, Government of Nepal; FAO; UNDP, GIZ-CIM, and ADB among others. I was an op-ed columnist for Republica between December 2008 – June 2012. I also worked as a Junior Fellow for Trade, Equity & Development program at Carnegie Endowment for International Peace, Washington, D.C .